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Tax Impact in India and Abroad in M&A

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By Hitesh Kumar & Shradha Dubey

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Mergers & Acquisitions (M&A)

M&A recognized by Income Tax Act,1961 (ITA)

Amalgamation/Merger

Acquisition (transfer) of shares

Demerger

Sump sale/Itemized sale

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TAX IMPLICATIONS INMERGER/AMALGAMATIONS

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Definition and Chargeability

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Merger not defined.

Amalgamation as per Section 2(1B) of ITA

Under ITA, Capital gains are charged to tax u/s 45.

S. 45 Profits & gains taxable when arising fromtransfer of capital asset in India.

Transactions tax free only on merger of a foreign

company into an Indian company.

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Exemption from CGT

No CGT implications on mergers/amalgamations

provided they satisfy conditions of S. 47 of ITA.

Conditions for exemptions from CGT -

transfer of capital asset from amalgamating co.

to amalgamated co. is exempt if amalgamated

co. is an Indian company. {S. 47(vi)}

transfer of share(s) in amalgamating co. is

exempt if (i) transfer is for consideration of

share(s) allotted to the shareholders of

amalgamating co. in amalgamated co., and (ii)amalgamated co. is an Indian company. {S. 47

(vii)}

Contd..

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Contd.

Exemption from CGT is applicable at

shareholder level to the extent shareholders

receive sharesas consideration.

Transfer of share(s) held in Indian co., by

amalgamating foreign co. to amalgamatedforeign co. is exempt if (i) at least 25% of

shareholders of amalgamating foreign co.

become the shareholders of amalgamated

foreign co., and (ii) such transfer is not subjectto capital gains tax in the home country of

amalgamating foreign co. {S. 47 (via)}.

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Treatment of accumulated losses &unabsorbed depreciation (S. 72A)

Accumulated loss (AL) & Unabsorbed depreciation

(UD) of amalgamating co. deemed to be AL & UD of

amalgamated co.

Entitlement is available if following conditions arefulfilled:

Amalgamating co.

has been in that business for at least 3 years,

has held at least 3/4th of book value of fixed assets

for 2 years.

Contd..

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Contd.Amalgamated co.

to continue the business (all businesses) of

amalgamating co. for at least 5 years,

to hold least 3/4th

of book value of fixed assetsof amalgamating co. for5 years,

to fulfill such other conditions as may be

prescribed to ensure the revival of business of

amalgamating co. or that amalgamation is for

genuine business purpose.

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Other Tax Benefits

Amalgamated co. can claim deduction for:

Expenditure incurred on scientific research (S. 35)

Expenditure for obtaining license to operate

telecommunications services (S. 35ABB)

Preliminary expenses (S. 35D)

Expenditure incurred for amalgamation (S. 35DD)

Expenditure incurred under VRS(S. 35DDA)

Expenditure on prospecting, etc., for certain

minerals (S. 35E)

Amalgamated co. is eligible for unexpired tax holidays

under sections 10A, 10AA and 10B.

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TAX IMPLICATIONS IN ACQUISITIONS

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Modes of Acquisition & Classification

of assets

Acquisitions may generally take following forms:

Acquisition of shares

Acquisition of assets

Acquisition of business (slump sale)

Tax treatment and applicable rates under ITA depend upontype of acquisition and period of holding of a particular

asset.

Long term capital asset (LTCA) and Short term capital

asset (STCA) are defined under S.2(29A) and S. 2(42A) of

ITA.

Gains arising from transfer of LTCA are Long Term Capital

Gain (LTCG).

Gains arising from transfer of STCA are Short Term Capital

Gain (STCG). 11

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Tax impact of Acquisition of shares

Shares held for 12 months or less Short term capitalasset.

Shares held for more than 12 months Long term

capital asset.

Sellers perspective :

Chargeable under section 45 of ITA.

STCG & LTCG rates depend upon whether shares

are listed or unlisted and also upon whether seller

is resident or non-resident (refer to Tables on next

slides)

DTAA (Mauritius) Article 13 Capital gains derived

by a resident of a State chargeable to tax in that

State only.

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STCG on Sale of Shares

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Nature of share Resident status Tax Rate (%) Section

Unlisted Resident Co. 33.22 Finance Act

Unlisted Non-resident Co. 42.23 Finance Act

Listed (if STT is

paid)

Resident Co. 16.61 111A

Listed if STT is

paid)

Non-resident Co. 15.84 111A

Listed (if STT is not

paid)

Resident Co. 33.22 Finance Act

Listed (if STT is not

paid)

Non-resident Co. 42.23 Finance Act

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LTCG on Sale of Shares

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Nature of share Resident status Tax Rate (%) Section

Unlisted Resident Co. 22.15 112

Unlisted Non-resident Co. 21.12 112

Listed (if STT is

paid)

Resident Co. Nil 10(38)

Listed if STT is

paid)

Non-resident Co. Nil 10(38)

Listed (if STT is not

paid)

Resident Co. 11.07 112 Proviso

Listed (if STT is not

paid)

Non-resident Co. 10.56 112 Proviso

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Buyers perspective:

Section 195: Withholding taxHonble Supreme Court held in G.E. India Technology

Centre Private Ltd. Vs CIT & Anr .

[MANU/SC/0688/2010] that the payer is bound to

deduct Tax at Source (TAS) only if the tax is

assessable in India. If tax is not so assessable, there

is no question of TAS being deducted.

Vodafone acquisition of shares of Hutch raises a

controversy over jurisdiction of IT Dept.- whether

acquisition of shares by a non-resident entity fromanother non-resident entity is taxable in India in

respect of capital gains of the non-resident seller and

if so, does the non-resident buyer have a withholdings

obligation u/s 195.15

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Vodafone transaction

Transfer of shares by HTIL (A Cayman Islands) Co.)

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Vodafone

(Netherlands)CGP Investments

(Cayman Islands)

Mauritian Cos. Indian Cos.

Vodafone EssarLtd.

(Indian Co.)

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Issues arising from Vodafone transaction

Jurisdiction over cross border transactions between

non-residents.

Extra territorial operation of Indian Laws.

Implications for overseas investors.

Possibility of other similar transactions to come under

tax scanner - Indemnity from the buyer.

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Tax impact of Acquisition of assets

Acquisition of assets may take place either as a

purchase of one or more individual assets or as

purchase of whole of the undertaking as a going concern

(slump sale).

Assets held for36 months or less Short term capital

asset.

Assets held for more than 36 months Long term capital

asset.

Sellers perspective in case of itemized sale of assets:

Chargeable under section 45

In case of non-resident seller, gains from transfer of

(i) short term capital asset chargeable @ 42.23%,

(ii) long term capital asset chargeable @ 21.22%.

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In case of resident seller, gains from transfer of(i) short term capital asset chargeable @

33.22%,

(ii) long term capital asset are chargeable @

22.15%.

Buyers perspective:

Section 195: Withholding tax

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Tax impact of Slump Sale

Slump Sale as per S. 2(42C) of ITA

The transaction of Slump Sale is chargeable

under section 50B of ITA.

Computation of capital gains in Slump Sale:If the capital asset being undertaking has been

held for more than 36 months long term capital

gain.

If the capital asset being undertaking has beenheld for 36 months or less short term capital

gain.

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Slump Sale

Sale proceeds Net worth Capital gains

Value of liabilitiesValue of assets

WDV

(depreciable

assets)

Nil

(capital assets

deduction

allowable u/s35AD)

Book Value

(other assets)

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TAX IMPLICATIONS IN DEMERGERS

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Definition and Chargeability

Demerger as per Section 2(19AA) of ITAAll properties of undertaking before demerger

become properties of resulting co.

All liabilities of undertaking before demerger

become liabilities of resulting co.

Resulting co. issues shares in consideration.

Shareholders (at least 3/4th in value) in demerged

co. become shareholder in resulting co.

Transfer of undertaking is on a going concern

basis.

Under ITA, Capital gains are charged to tax u/s 45.

Section 45 Profits & gains taxable when arising

from transfer of capital asset in India23

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Exemption from CGT

No CGT implications on demergers provided they

satisfy conditions of S. 47 of the ITA.

Conditions for exemptions from CGT

transfer of capital asset by demerged co. toresulting co. is exempt if resulting co. is an

Indian company. {S. 47 (vib)}

transfer or issue of share(s) by resulting co. to

the shareholders of demerged co. is exempt iftransfer or issue is in consideration of demerger.

{S. 47 (vid)}

Contd..

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Contd..

Transfer of share(s) held in Indian co. by

demerged foreign co. to resulting foreign co. is

exempt if (i) shareholders holding at least 3/4th

in value continue to remain the shareholders ofresulting foreign co., and (ii) such transfer is not

subject to capital gain tax in the home country of

demerged foreign co. {S. 47 (vic)}

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Treatment of accumulated losses &unabsorbed depreciation (S. 72A)

Resulting co. is allowed to carry forward and set off

accumulated loss & unabsorbed depreciation of

demerged co. in following manner:

If loss/unabsorbed depreciation is directly

relatable to undertaking transferred to resultingco. entirely allowed to be carried forward and

set off.

If not directly relatable then proportionately

allowed to be carried forward and set off.No such conditions like holding of at least 3/4th

of book value of fixed assets for 2 years or

continuance of business for a minimum

specified period are applicable.26

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Other Tax Benefits

Resulting co. is eligible to claim deduction for:Expenditure for obtaining license to operate

telecommunications services (S. 35ABB)

Preliminary expenses (S. 35D)

Expenditure incurred for demerger (S. 35DD)

Expenditure incurred under VRS (S. 35DDA)

Expenditure on prospecting, etc., for certain

minerals (S. 35E)

Resulting co. is eligible for the unexpired taxholidays under sections 10A, 10AA and 10B.

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Thank You!

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